Once a mortgage gets quite low (say about 40k) can you just pay it off?

kevinqq

Is there a sweet spot where a mortgage doesn't have much left to go that you should just find a way to pay it off and be done with it?   Or is it better to continue till it's gone?     

Thanks

ACG

A mortgage costs money in the form of interest. 
If you have the cash in the bank its not a bad thing to pay it off unless you are getting a higher interest rate in savings after tax. 

kevinqq

or if there is a fee to repay early?

BridgetTheCat

kevinqq said:

or if there is a fee to repay early?

The fee might be less than what you would pay in interest.

eschaton

Work out what’s best with internet rates. 

Last year I spent £40k to repay my mortgage 6 years early. 

Doing so has and will continue to be very financially beneficial. 

kevinqq

eschaton said:

Work out what’s best with internet rates. 

Last year I spent £40k to repay my mortgage 6 years early. 

Doing so has and will continue to be very financially beneficial. 

when the true figure would have been what?

Exodi

This is fundamentally a Maths question, unanswerable without details of the variables.

Let's say you have £40k in a T212 Cash ISA earning 3.85% interest (just for the sake of example, other providers and rates exist). Over one year you would earn £1,540 in interest (40000*0.0385).

Let's say your mortgage rate is 5% and your balance is £40k. Over one year, you pay £2,000 in interest (40000*0.05).

Now this is probably obvious to a lot of people but if you expect your mortgage rate to be higher than your savings, you might want to be putting money there instead. If you were able to magically move the hypothetical savings above into your mortgage, you'd save £460 over the year.

However there is a quirk in ERC, which can vary by lender and where you are in the fixed term. A typical penalty might be 1% for every year left on your fixed term, so if you have 2 years left, you might pay 2% of the balance. So on £40,000, this might be £800. As you'd only expect to save £460, you can see now it might not be worth it.

But, many mortgages allow you to overpay a certain amount penalty free - oftentimes this can be 10% of the original balance (but check your individual mortgage). In this situation, assuming your mortgage rate is higher than your savings rate, you should overpay as much as you can penalty free each year, until either the amount of ERC is less than the savings you'd make or the fixed term ends and you can pay off the remaining balance.

So to take the example above to its conclusion, let's say your original mortgage was £200k - this means you can overpay £20k per year. Since your mortgage rate is higher you decide to overpay, meaning the first £20k of the overpayment is ERC free. Running the sums again, we now have a decision between keeping £20k in savings, and earning £770 in savings interest, or overpaying the mortgage, saving £1000 in mortgage interest, less £400 in ERC = £600. In this situation, it would be worth leaving the money in savings (and likely clearing the mortgage the following year ERC free when your overpayment allowance resets).

As I said though, this is a Maths question and all depends on your particular rates, mortgage terms, savings rate, potentially tax position, etc. 

Altior

The argument I always make in these types of threads is that it's far easier to liquidate a cash asset than one in your domestic property.

So if it was neutral, ie similar rates on cash and the mortgage then I would still keep the cash. If you still have access to lots of cash even after settling the mortgage, fair enough, but absolutely no need to lock it away in the property if you don't.

As long as your mortgage rate is reasonable, I wouldn't touch it.

Exodi

Altior said:

As long as your mortgage rate is reasonable, I wouldn't touch it.

I agree, though for different reasons (I only provided an objective answer because the OP asked a specific question).

I wouldn't overpay a mortgage because in terms of my long term plan, I expect my investment returns to be greater than what I'd expect to pay in mortgage interest (my XIRR is currently ~12% whereas my mortgage is ~5%, so it's not even close).

At some point in time, the value of my investment will equal my outstanding mortgage balance, and someone may consider selling off their investments to clear their mortgage (though this would mostly be for emotional reasons - such as the notions of 'security, freedom, etc' that get cited).

From a strictly returns-focused perspective, one might consider paying the mortgage down over the normal term and investing all surplus cash the optimum strategy (obviously after establishing a sensible emergency fund and any other more important expenditure) because investment returns are expected to beat mortgage rates over the long term.

eschaton

kevinqq said:

eschaton said:

Work out what’s best with internet rates. 

Last year I spent £40k to repay my mortgage 6 years early. 

Doing so has and will continue to be very financially beneficial. 

when the true figure would have been what?

What true figure?

Exodi

eschaton said:

kevinqq said:

eschaton said:

Work out what’s best with internet rates. 

Last year I spent £40k to repay my mortgage 6 years early. 

Doing so has and will continue to be very financially beneficial. 

when the true figure would have been what?

What true figure?

I presume they mean what would you have paid towards your mortgage over the 6 years if you didn't repay it early.

It's a bit of a warped way to look at it though as obviously you saved money not paying interest on the mortgage, but you also lost potential interest on the savings.

I think the OP is looking for a simple clear answer of "Yes, doing X is best" when in reality it's not black and white.